Continuing on the topic of of Nordic model, The New York Times brings us this report by Alan Cowell (sorry, registration required):
The Swedish economy is set to grow by 3.7 percent this year — almost twice the rate forecast even for Germany, the only one of the big Continental European economies showing signs of confidence. Unemployment, though higher than the Social Democratic government admits, is still lower than the nearly double-digit joblessness of France or Germany.
Yet, defying conservative American beliefs, the economy prospers — even though taxes here remain high and big government administers cradle-to-grave social programs that absorb more than half of the national output.
It is called the Nordic model. The question some Europeans are asking is: Would it work farther south, in Germany or France, or even Italy?
19 comments:
Brian: The legislation you found is a very specific amendment to the patent law that allows least developed countries - primarily in Africa - to import patented drugs from Canada cheaply in the event of an emergancy. This doesn't apply to drugs sold in Canada. See this page for an explanation:
http://strategis.ic.gc.ca/sc_mrksv/cipo/jcpa/p2-e.html
You may have been thinking of the Patented Medicine Prices Review Board. This section of their FAQ addresses how they regulate drug prices:
http://www.pmprb-cepmb.gc.ca/english/view.asp?x=272#12
If you accept that drug prices don't respond well to market mechanisms (and I can understand if you want me to justify that further) then the guidelines given seem to me to be a reasonable attempt at approximating what the market might produce if it worked properly.
... Ami.
Stryker:
This article claims that administrative costs in Canada are $307 per capita vs. $1059 in the U.S.
This article gives some other reasons. I found this part particularly interesting:
"The United States has fewer physicians, hospital beds, and acute care hospital bed days per capita than the median country in the Organisation for Economic Co-operation and Development. But the United States has a higher ratio of specialist to primary care physicians, and it is specialists who perform high-cost innovative procedures."
That's what I get for doing a "quick search" or Canadian law....
The PMPRB states that they use criteria set out in the patent act. The only place in the patent act I could find the criteria was the referenced law. Perhaps there's another, but the PMPRB states "To determine if the price of a patented drug sold in Canada is excessive, the PMPRB applies factors set out in the Patent Act and in its price guidelines.".
The list they provided is how they determine if they need to flag a drug's price as suspect. They don't specifically state how they determine a drug is "within the Guidelines".
But the whole point is, US consumers are paying the R&D costs while Canadian consumers are free riding and only paying the manufacturing costs plus a small margin.
Back to the subject of this posting. I'd suspect Sweden's economy has mostly overcome the burden of high taxation rather than being helped because of it.
This leads me to something I've been suspecting for a long time. Any economy will eventually adjust to any fixed level of taxation and become productive given enough time. The higher the taxation the more time it will take. Changes in tax rates will give a boost (when lowered) or drag (when raised) that will eventually level off if left unchanged long enough (think of the Laffer curve as a moving target that slowly shifts after changes in taxation). I haven't done any research in this area and I'm sure you'll point me to a paper where someone has already proposed exactly this idea (no idea is truely new)...
I should probably modify my statement to "Any Free Market economy can eventually adjust to taxation." Socialist economies don't work the same way (they don't work).
Brian: My reading of the FAQ is that the points given are a summary of the more detailed guidlines.
I don't see how it follows from this that Canadians are only paying the manufacturing cost plus a small margin.
The logic behind the policy is (I assume) is that in a competitive market no drug should cost significantly more than other drugs that offer similar treatment. So using similar drugs as a benchmark for the price makes sense. If the R&D costs make the drug much more expensive than competitors that do the same thing, then the drug probably shouldn't have been developed in the first place. If drug companies are wasting money developing drugs that don't offer anything new then that's not something any consumer should have to pay for.
For breakthrough drugs that don't have peers for comparison this obviously won't work. So the Canadian policy is that we pay the median of what other industrialized countries pay. Not the greatest mechanism, but since drug prices aren't set by market forces, a reasonable fallback.
It's true that this policy makes it hard for drug companies to develop and market new drugs that offer no real value just so they can retain patent protection. But that's a waste of R&D resources anyway, and not something that should be encouraged.
I don't have any papers for you, but the idea that economies will adjust to any (sane) level of taxations is pretty well accepted. Lots of people have looked for a long term relationship between taxation and growth, and nobody has come up with a convincing relationship.
I'm not sure I understand what you mean about the Laffer curve though. Laffer was referring to tax income, not growth directly. Basically, if your tax rate is 0% then your income is zero, while if your tax rate is 100% then your income will also be zero (since nobody will bother to work), so there must be some level of taxation where income is maximized, and deviating from that level would lower income, whether you increase the tax rate or lower it. This is pretty sensible as far as it goes.
The problem for Laffer was that he assumed the U.S. economy was on the right side of the curve, and lowering the tax rate would actually increase government revenue. As it turned out, the Reagan tax cuts didn't increase government revenue.
The only evidence that anybody ever found for an economy on the right side of the Laffer curve was (appropriately enough for this thread) Sweden in the early '80s. At that time they had an effective marginal tax rate of 80%: Here's a paper about it. (Unfortunately not free, but the abstract says what you need to know).
... Ami.
Ami,
Consider a drug like Amoxicillin. Its an antibiotic in widespread use, it's been out for a long time and the development costs were paid long ago. It's dirt cheap (less than $10 for a typical course of treatment of 30 pills, 3 per day for 10 days), works against a broad specrtum of infections, and has limited known side effects. Unfortunately, there are many bacteria which are becoming immune to this drug so there is a need for new antibiotics. The drug is also a little slow in it's effect so drugs that clear infections faster are also improvements. I wouldn't call the development of new antibiotics a "waste of money".
Any new antibiotic would be placed in the same class as the existing drugs. These are not "breakthrough" drugs since there are existing drugs that treat similar infections. A breaktrhough drug would be a treatment for a condition that never had help before (say a cure for HIV). So a newer antibiotic (let's say levaquin) would have to be priced such that it costs less than $10 for a full course of treatment or it would trigger an investigation. By just the listed standards, if it cost the manufacturer more to produce a levaquin pill than an amoxicillin pill, they would have to price it below costs to sell it in Canada. It's not likely they'd do it. The direct manufacturing costs + 15% seems like a reasonable way to insure that Canadians received new drugs that cost more to manufacture than old drugs. I don't know the direct manufacturing costs of Levaquin but I assume it's not significantly more that Amoxicillin.
I've paid $140 for a 10 pill prescription of Levaquin (1 per day for 10 days) in the US. I know that most of my cost for those pills was for R&D, USDA approval, manufacturer's profit (you don't think they'd to it for free do you?), and pharmacy profit (you don't think they'd do it for free do you?). On the other hand, if those same pills are priced at $10 for the full course in Canada, the Canadians are not covering the R&D costs. I'm subsidising the Canadians.
Ami,
I feel like Brian and I are tag-teaming you, but To continue his line of thought....
The average drug costs .5-1 billion (thousand million) dollars.
http://csdd.tufts.edu/NewsEvents/RecentNews.asp?newsid=6
So even if production cost was the same, and the Canadians would allow a 15% surcharge, the company would have to sell between 300,000 and 600,000 "courses" to make up for the R&D at Canadian rates. They have to make those sales within a few years before the patents run out, as well.
On a side note, I've been looking into the Norwegian economy in my spare time. It seems that most of the growth there is because of their oil production (I was only looking at raw data, and could be quite wrong ... moved a decimal place somewhere... he he he.)
Stryker: The 15% thing was unrelated - that was about a specific program to allow Canadian manufacturers to supply least developed countries in times of crisis. This is not in any way related to drug prices in Canada. There is no 15% limit on gross margin for drugs sold in Canada.
Brian: The classification of drugs isn't so straightforward. If levaquin offers benefits over existing drugs then that is taken into account. See the review procedures here.
In fact there has been no undertaking for Levaquin (so I assume that means the board didn't get a complaint and didn't need to make a ruling - I'm not quite clear how the whole process works myself). But, Levaquin is cheaper in Canada because Janssen-Ortho is paying a penalty for overcharging for another drug - Evra - by reducing the price of Levaquin. Presumably Jansson-Ortho preferred this over paying cash. See here for info.
I don't know what the price was before the reduction, but the current price appears to be on the order of US$6 per pill. Less than you paid, but still not cheap. Certainly much more than the manufacturing cost.
... Ami.
As it turned out, the Reagan tax cuts didn't increase government revenue.
What? I wish I had Indy's OMB link to show this to you, but during Pres Reagan's 8 years in office ('81-'89), tax revenues increased from $550 B to $950 B, despite the fact we were in the midst of a recession going into his presidency (Pres Carter had just finished doing the only thing to the economy that gov'ts truly have the power to do to a "free" economy, and that's wreck it). The deficit increased because of out-of-control spending. You could argue that the spending was what caused the increased revenues, but the revenues increased significantly.
As for R&D costs, the thing that's being missed in this debate is the R&D costs associated with failed medicines. Perhaps Canada allows for enough profits to pay R&D costs on the drug that made it to market (I don't know enough to say), but what about the 10 other drugs that didn't make it? Much of the R&D work that's done is trial-and-error, with mainly error being the result. Companies have to pay for both the successes and failures, and the US ends up paying the tab on the failures. So yes, the US consumer is subsidising drug prices around the world.
Richard: Revenue didn't increase significantly. Remember that the 80's were still a period of relatively high inflation, so that $950 B is really only $662 B in 1981 dollars.
Then take into account the population increase (7.6% over the period). In 1981 dollars, revenue per person was $2408 in 1981 vs. $2694 in 1989, an increase of 12%.
Take the 8th root of 1.12 and you find that revenue per person increased an average of 1.42% per year.
Now in order to believe that the tax cuts paid for themselves you must convince yourself that real GDP per capita would have only grown less than 1.42% per year without the tax cut.
And of course we haven't taken into account the deficit spending (which you mention). It is indeed likely that revenue would have been less without Reagan's fiscal stimulus.
This was just a quick-n-dirty calculation. I couldn't find a nice analysis anywhere quickly, but even if I made a mistake, I've read similar things all over the place, so the substance won't change.
For the drug issue, R&D aren't taken into account at all in the Canadian system, and neither is manufacturing cost. The system tries to approximate what might happen if there were a functioning market to set prices. It certainly won't be perfect, but it appears to be better than the U.S. system, where no attempt is made to approximate a market price at all.
... Ami.
Well at least you acknowledged that there was a real growth in revenue after the tax cuts, even after adjusting for population growth and inflation.
"Now in order to believe that the tax cuts paid for themselves you must convince yourself that real GDP per capita would have only grown less than 1.42% per year without the tax cut."
This is the real question isn't it? Would the economy have grown at the same rate (or even at all) without the tax cuts. While I admit than an economy can adjust to high taxation and high interest rates given enough time, it's not likely it would have happened during the 80's (and probably not even into the 90's) without the tax cuts and the Fed lowering rates from the extrodinary levels encouraged by Carter. You'll probably argue that the rate cuts were more stimulative than the tax cuts. I'd argue that it was a combined effect of both.
Personally, I prefer an economy with improving levels of employment, low tax rates with slow increases in government revenue to the European model of 10% unemployment and high tax rates that provide slow increases in government revenue.
Your link to the review procedures didn't work. But from the way you phrased that, any drug that offers any benefits over existing drugs would have to fall into the "breakthrough" category in order to avoid price comparisons with amoxacillin for antibiotics or aspirin for pain killers, etc.
As for your comment about the price controls approximating a free market, that's just absurd. Price controls are the antithesis of free market pricing.
I will concede that the US drug market isn't perfect as we have controls on access to drugs and limited consumer information about alternatives. We also have large numbers of insurance policies that provide a fixed co-pay amount so most consumers don't bother to shop around to different pharmacies for a lower price (and thus little incentive for pharmacies to cut prices).
Brian:
Well at least you acknowledged that there was a real growth in revenue after the tax cuts, even after adjusting for population growth and inflation.
Of course. The only way there could be no growth in revenue would be if there were no growth in the economy.
Are you claiming that without the tax cuts the U.S. would have been in a recession from 1981 to 1989? You can't really believe that.
I'm also a little amazed that you're blaming high interest rates on Carter. The high rates were intended to tame inflation, and they achieved that goal. Volcker is hero among a lot of people for successfully taming inflation.
Regarding drugs: I didn't say "free market", I said "functioning market". There are a number of reasons a "free market" does not mean a "functioning market" in this context. Basically, the assumptions that underly the idea of the "invisible hand" aren't even close to being true in this industry:
1. The people who pay for the drugs (consumers/insurers/governments) aren't the same as the decision makers (doctors).
2. Vendors have monopolies on drugs (created by the patent system to overcome another kind of market failure).
3. Consumers don't have full information about the market, so they don't know what the alternatives are (related to point 1, but slightly different).
4. Critically ill people are a poor credit risk, so they may not be able to afford treatments even if they would be willing to work to pay for them.
(I'm sure I could think of more given time, but this is a pretty good list.)
So in this case price controls are a closer approximation to a functioning market than can be acheived under a free market.
You touched on some of these points in your post:
You mentioned consumer information about drugs, but it takes years become a doctor or pharmacist, and even then it takes time to keep up-to-date on current developments. It's unrealistic to expect the average consumer to obtain the knowledge needed to prescribe their own medicines (even if that were legal).
Shopping around at pharmacies won't help since there is only one supplier for patented medicines.
... Ami.
Hi Ami,
No, I'm not claiming that the US would have remained in a recession through the entire 1980's. What I am claiming is that the absolute production of the economy (rather than rate of growth) would not have reached the levels it acheived in the mid 80's until the late 80's or early 90's.
Consider 2 alternatives:
1. A short recession followed by explosive growth. This is pretty much what happened in the US throughout the 80's and 90's. Lets say at the start of the period (1981) the economy produced 100.
The year 1 it had a recession of 1.9% and produced 98.1
Year 2 we had a growth of 4.5% and produced 102.5
Year 3 we had growth of 7.2% and produced 109.9
Year 4 we had growth of 4.1% and produced 114.4
Year 5 we had growth of 3.5% and produced 118.4
Year 6 we had growth of 3.4% and produced 122.4
Year 7 we had growth of 4.1% and produced 127.4
Year 8 (1989) we had growth of 3.5% and produced 131.9
2. A longer recession followed by slower growth (due to the drag of high taxes). This one is completely hypothetical but is based on the assumption that the lack of tax cuts would have extended the recession to a second year and would have slowed the rate of growth in the recovery and following years by 2%.
Starting point 100.
Year 1 recession of 1.9% (same as before). Total production 98.1
Year 2 Recession of 1%, production 97.1
Year 3 growth of 2.5%, production 99.5
Year 4 growth of 5.2%, production 104.7
Year 5 growth of 2.1%, production 106.9
year 6 growth of 1.5%, production 108.5
Year 7 growth of 1.4%, production 110.7
Year 8 growth of 2.1%, production 113.0
In words: the early boost in production and increased rate of growth caused by the tax cut stimulus allowed the economy to keep FAR ahead of where it would have been otherwise. If the government were collecting 20% of the 131.9 production in taxes for 26.38 revenue, it would have to collect 23.3% of the 113.0 production to match the same revenue. But beyond just government revenues, the people are far better off with the higher levels of production (assumes lower unemployment, higher incomes, and more disposable income).
Also, regarding Carter. I said Carter encouraged high interest rates. I know it's the Fed that actually raised them.
I’m a bit older than you. I remember Carter giving a speech encouraging Volker to raise rates to levels high enough to stop consumer borrowing. If I remember correctly, they were raised to nearly 20%. Yes, this stopped inflation in its tracks. It also killed the economy and I believe was the direct cause of the recession in the early 80’s. And yes, lowering the rates from these excessive levels contributed to the growth in the 80’s and would have allowed a recovery and return to growth anyway (though probably MUCH smaller).
The only way there could be no growth in revenue would be if there were no growth in the economy.
Not accurate, Ami. Revenues will not go up if rates are dropped to a point that the increased growth is insufficient to meet the prior level's revenues. Pres Reagan's tax cuts were massive (I believe from a top marginal rate of 76% to 28%, and a reduction from 5 brackets to 2), dwarfing the minimal cuts of Pres Bush 43 (Brian can correct me if I get any of that wrong).
Also keep in mind (and I was guilty of this in my example) that the appropriate years for comparison weren't '81 and '89. NONE of Pres Reagan's tax policy was in effect at any point in '81 (I believe the first tax cut was passed in '82, and probably didn't go into effect until '83). Also keep in mind the tax code wasn't significantly changed until '90 when Pres Bush 41 signed a tax increase, which also didn't take effect until '91 (when we went into a recession that we emerged from in late '92-early '93) (I don't believe Pres Bush 41's tax increase caused the recession, as economies tend to be cyclical, but I also don't believe it helped anything).
So yes, there are very good reasons to blame Pres Carter for the high interest rates and sluggish economy. There's a very good reason Pres Carter, as the incumbent, went down to one of the greatest electoral defeats in history (489-49), and there's a reason Pres Reagan repeated this performance in '84 when he won 525-13.
I'll accept that Carter encouraged high interest rates, but I'm claiming that this was the right policy at the time. So if Carter really did have something to do with Fed policy then he was a pretty smart guy.
This is why I find your statement surprizing. Volker's successful battle against inflation makes him sort of a legend in macroeconomic circles. It was certainly tough medicine for the economy, but it created led to a new era of low inflation. Inflation targeting now dominates monetary policy.
... Ami.
I guess you might consider Volker and Carter heroes if you believe inflation is worse than recessions....
Personally, I prefer a bit of inflation to high unemployment and the suffering that goes with it. There's a good reason that Reagan's characterization of the country being in a malaise resonated with so many voters.
I'm also a bit concerned that the current fed actions may go too far and induce yet another recession in the name of the battle against inflation.
Brian: Your view on inflation sounds reasonable at first, and it would have been pretty mainstream in the 1960s. The stagflation of the 70s changed all that.
The idea is that people learned to expect inflation and take it into account in their daily lives. Every calculation about future cost and income had a built-in allowance for inflation. When that happens the relationship between higher inflation and lower unemployment (the Phillips curve) breaks down.
That sort of makes sense if you figure that the relationship between unemployment and inflation depends essentially on fooling people into thinking they're richer than they really are. Once people figure this out, the effect disappears. In order to get the same stimulative effect you have to have more and more inflation - you have to make sure the actual level of inflation is higher than what people planned for.
While a low level of inflation is pretty harmless (and better than deflation in any case), high levels of inflation are damaging. In particular, if you have a high level of inflation you also have high variance in inflation. You can't really plan for the future properly because you don't know if inflation will be 15% or 25%, and the difference is really important (much more so than the uncertainty we live with today - will inflation be 1.5% or 2.5%).
Here is a tutorial on the he Expectations-Augmented Phillips Curve I don't think I can really explain it any better.
... Ami.
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